Africonomie’s Digital Dialogue series continues with a look at how development finance institutions (DFIs) are assisting Africa’s adaptation to and recovery from the COVID-19 crisis.
A panel of market participants with real world experience convened to discuss the challenges and opportunities they live with every day.
- Admassu Tadesse, CEO, TDB Group.
- Naana Winful Fynn, Regional Director, Norfund.
- Kevin Njiraini, Director for Southern Africa and Nigeria, IFC.
- Vibhuti Jain, Regional Director for Africa, US International Development Finance Corporation
- Greg Cohen, Co-founder and COO, Asoko Insight
- Moderator—Enitan Obasanjo-Adeleye, Head of Research, African Private Equity and Venture Capital Association
Asoko Insights’ Presentation
Greg Cohen of Asoko Insights gave a presentation describing his firm and its services with emphasis on its Digital Origination product. The aim is to connect African companies to financing. Data is fed to DFIs and other financing sources to facilitate due diligence. Asoko Insights employs a top down method that gathers data from institutional and government sources, and a bottom up method that encourages companies to submit their data in order to gain visibility to investors.
Status of DFI’s support initiatives during the pandemic
According to jiraini, multilateral organizations have committed $240m IFC has committed $8bn to support existing clients; 2bn for trade finance, $2bn for liquidity, $2bn for working capital and $2bn for the realty sector. Starting with existing clients especially for IFC’s supply chain and working capital solutions, the supports mostly who use the funding to support their clients.
Norfund, part of the DFI alliance is also focused on its existing portfolio. Their work includes providing direct support to the agribusiness and manufacturing enterprises. $2bn has been allocated to banks to lend to SMEs. Credit risk sharing is one tactic used to encourage bank lending. Norfund welcomes co-investors and is part of the DFI Alliance comprised of 16 DFIs from Europe and North America. The common theme is a willingness to collaborate with other organizations to magnify the resources available to companies in the region.
TDB has emphasized supporting supply chains and trade. The firm does a lot of work with commodities. Trade finance volumes are down as trade has contracted but food and agribusiness remain strong. TDB is opening letters of credit for key inputs to the supply chain. Business continuity in the portfolio is always a concern. TDB still offers corporate finance, project finance, and SME lending. Pandemic-specific initiatives include funding medical supply firms textile maker who can convert their facilities to manufacture PPEs. Though small, these financings supporting industrial parks and continued industrialization. Unlike the typical DFI, TDB does not offer concessional financial instruments. Consequently it does not receive donor funding. The firm does partnering with other DFIs such and the African Development Bank and the World Bank.
USIDFC in its current form is a new entrant to the DFI community. Health care is DFC’s global priority and has been even prior to the pandemic. Goal to support health care supply chains. More flexible. As an example of improved flexibility, 25% US shareholding is no longer required. USIDFC invites proposals for private sector health care projects. DFC’s goal is to fund $2bn and catalyze $5bn.
Operating in the new reality of the COVID-19 pandemic.
Norfund finds challenges at all phases of the investment process. Most deals are in clean energy In person meetings are preferable to build trust with sponsors Norfund based in Ghana is adjusting to working virtually. The preferred approach is to front end due diligence, using virtual data rooms when possible. The hope is to push back in-person meetings until travel is more feasible than it is at present. It is easier for Norfund in their home base in Ghana where the lock down has been lifted.
IFC has more staff on the ground, about 300 in total plus hubs in Nairobi, Joburg and Dakar. Focused on existing clients accelerates due diligence. They know the clients and their products. The transactions are often simpler—topping up existing financing. Local banks are also helpful for due diligence since they have also analyzed the clients. Uses other local resources such as law firms to handle documentation
Tadesse of TDB was asked about regionalization of supply chains given the constraints imposed by the pandemic. TDB like most of the industry utilizes local financial firms and legal firms. The firm is also experimenting with blockchain to conduct trade finance transactions in place of DHL using a blockchain based trading platform in a deal to ship fertilizer from Morocco to Ethiopia.
For the USIDFC the pandemic highlights vulnerabilities in health care and critical infrastructure. Connect Africa is DFC’s effort to fund infrastructure and connectivity. It sees businesses adapting to the pandemic, innovating and finding new ways to do business and pivot to seize new opportunities
Ashoka has not seen as much use of block chain but Cohen notes the importance of information technologies in the current environment. Fast tracking due diligence is a common theme, making Zoom and electronic data rooms essential tools. The firm continues to maximize technology to support DFIs and PEL,
IFC is conducting webinars for portfolio companies and helping them learn to stress test. They are developing better ways to assess their condition. Speed is of the essence and the feel the urge to identify and address urgent needs quickly
TDB sees larger companies lending workers for tech assistance to SMEs. Rather than work directly with SMEs, TDB works through banks so that they can better service their SME clients.
Blockchain facilitates document movement. TDB has not seen it used outside of trade finance but they can envision greater efficiency from block chain in the property sector especially where English law applies and electronic documentation and signatures are accepted.
Ashoka Insight – Trade finance ledger is specific use case for block chain. Oversold generally. Broad adoption is a long time away from widespread adoption in Africa.
Norfund sees its role as capitalizing other forms of capital. Helping funds to build capacity.
Other structures?
Norfund – Nofund is open to alternatives investment styles and longer terms. (Some of the private equity professionals from recent webinars have expressed a similar sentiment.) Tougher macro situation due to COVID requires more flexibility. The standard private equity model is coming under question.
An audience member asked for elaboration on risk sharing. For Norfund risk sharing means bringing in additional partners, particularly from their Norwegian network. TDB is also open to risk sharing to scale up and expand outreach. Working with banks and microfinance institutions, they guarantee part of a portfolio’s risk. The strategy enables financial institutions to stay within risk management guidelines using such risk participation agreements.
The DFC’s approach is to work to strengthen local institutions by working with local institutional investors. They have not used block chain but are promoting innovative financing structures involving non-bank financial institutions and using insurance companies for risk sharing.
Pension funds say they do not have the capability to evaluate funds so Norfund shares their experience and best practices to aid the capacity building effort. Other DFIs such as CDC and IFC also have capacity building efforts. TDB is working with pension funds who seek to collaborate with DFIs. Their business development, due diligence and other skills fill gaps in the capabilities of local institutional investors. TDB also offers diversification via local bonds as a collaboration vehicle. TDB issues local currency bonds that are higher rated than most local investments. The firm also invites local institutional investors to invest in TDB’s own shares which pay hard currency dividends and provide a form of diversification for the investor.
DFC leverages other US government agencies to help co-invest with private investors and collaborate with local institutional investors. MIDA, a partnership between USAID and the National Association of Securities Professionals facilitates this collaboration by introducing US pension funds to African deals and institutions.
Desired outcomes for a post-COVID Africa:
Tadesse of TDB – Self sufficiency e.g. in food and agribusiness sector; transformation to a net food exporter. Opportunities to regionalize the agricultural value chain. Strategic partner to regions such as the gulf states, Kenya, Tanzania and other African countries can be breadbaskets to the Persian Gulf.
Fynn of Norfund also would like to see Africa as a net exporter of food. There are many efforts around the continent to improve value chains and support companies in agribusiness. The pandemic induced pause is an opportunity to coordinate these efforts for better results
Cohen of Ashoka Insight – innovation to localize value addition along with easing of capital constraints and digital adoption for resilience and growth after crisis passes.
Jain of DFC – More resilient supply chain; private sector innovation in Africa.
Our takeways from the conversation:
- Like their private equity counterparts, the theme for DFIs during the COVID-19 crisis is to focus on their portfolio and not take on a lot of new business.
- Each in their own way DFIs are supporting greater participation by local institutional investors in private sector investing.
- Digitization and technology adoption is an important tool for value creation. This is the first of these webinars in which we heard real world examples of Blockchain use.
- The panelist see greater economic self sufficiency as a most favorable outcome for Africa. Agribusiness is a key sector where Africa could become a net exporter, feeding itself and other parts of the world.
As lock downs and quarantines ease in various countries, investors and financial institutions should consider DFIs as potential partners in bringing capital to Africa.
emergingmktstories 